Speech - The Importance of Inclusive Prosperity




"The Importance of Inclusive Prosperity: If We Don't Grow Together, We Grow Apart"






Tonight I want to talk to you about the central economic challenge of our time: How do we stop the growing inequality of wealth and income distribution and restore equity and social mobility as a driving force for economic growth into the future?

In the United States and other developed countries trickledown economics has delivered rampant inequality, a hollowed-out middle class and an army of working poor.

While Australia has avoided this fate, the radical agenda of the Tea Party Liberals is attempting to take us down this American road at precisely the same time we have leading American economists and politicians looking to Australia as a road map on how to achieve more inclusive economic growth.

Such is the gravity of the problem of economic inequality in the United States the Democratic Party's think-tank the Centre for American Progress established the Inclusive Prosperity Commission to shed light on what policy settings progressives must implement to ensure growth with equity. I was privileged to contribute as a commissioner with the IPC and join the likes of Larry Summers and Ed Balls in writing the report.

To give you a rough idea of the gravity of the economic inequality which prevails in the United States at the moment, Larry Summers has calculated that if the same income distribution in the United States prevailed today that did in 1979, the top 1 per cent would have $1 trillion less today, and the bottom 80 per cent would have $1 trillion more. That works out to about $700,000 a year for a family in the top 1 per cent, and works out to about $11,000 a year for a family in the bottom 80 per cent.

To give those figures more context the current GDP of Australia, the world's 12th largest economy, is a bit over $1.5 trillion!

Here in Australia over the past 30 years we have had an increasing concentration of wealth at the top. However, we have done a better job of matching strong growth with social equity than just about any other developed economy - an achievement we protected and enhanced during the Global Financial Crisis.

No graph illustrates our success in matching strong growth with social equity than this one.

This is Australia's median income growth since 1995 compared with the United States median income growth since 1995. As you can see median incomes in Australia are well over 50 per cent higher than 1995 levels. By comparison, median incomes in the United States have been virtually stagnate since 1995 with the GFC whipping out what little median income growth had occurred.

These outcomes in Australia and globally happened by choice, not by chance. There are policies we can put in place to ensure that we grow more strongly by growing more fairly. These policies are canvassed in the IPC report, which concludes that inequality isn't just an economic problem. It is a challenge that "threatens to become a (serious) problem for the political systems of the developed world and for the idea of democracy itself."

My book "The Good Fight" chronicles how over six years of Labor Government, which included the GFC and its economic aftershocks, Australia outperformed the rest of the developed world and stared down the biggest economic downturn since the Great Depression.

I wrote the book because it was important to show what a real economic emergency is and how we dealt responsibility with it. It's a warts and all account of our time in office but is overwhelmingly a story of successful economic policy and enduring social reform.

I've always believed you have to understand our history to understand our future. As "The Good Fight" argues if we accept the conservative narrative - a fundamentally and demonstrably false narrative that laissez-faire would have seen us through the GFC - then the next economic crisis, and there is always a next economic crisis, will result in mass bankruptcies, mass unemployment and mass human misery.

So I want to give you some of the flavour of what we did, how we did it and why we did it.

The conservative propaganda machine has worked overtime to cover up our success story but the simple fact is that following the GFC the global economy entered its deepest recession since World War Two. During this period the Australian economy performed better than other advanced economies on nearly all-relevant indicators.

And as this graph shows, in the six years after the GFC erupted, the Australian economy grew by 15 per cent and is now almost 20 per cent larger - a spectacular result.

As you can see, every G7 economy except Australia went into recession.

Share markets were in free-fall and some of the largest financial institutions in the world had to be bailed out. Financial flows simply stopped, starving business of finance - economies quite simply ground to a halt.

But unlike the Great Depression, the interconnectedness of the global economy meant that this financial crisis spread like wildfire.

I'm just going to flash up a timeline as a backdrop to talk about the GFC.

In March 2008, the fifth biggest investment bank in the world, Bear Stearns, collapsed and was subsequently rescued. From that day on, we began privately preparing for the worst but hoping for the best.

Until Bear Stearns, our first Budget was being framed to fight Peter Costello's inflation genie which had escaped the bottle.

In April 2008, I was in Washington for the IMF meetings and took the opportunity to meet with investors and one meeting stands out.

One leading investment banker said to me:

"It's not the end, it's not the beginning of the end, it's the end of the beginning".

I then went home and we recalibrated our Budget, deciding not to proceed with some spending cuts, even though the IMF had upgraded global growth forecasts.

Indeed, Tuesday, 15 September 2008 is seared in my memory as the day Lehman Brothers imploded.

Things were moving so fast it was difficult to keep up with it.

Back in Australia, we confidentially started preparing a fiscal stimulus package, as the RBA cut interest rates by 100 basis points on 7 October - an unprecedented decision.

On the following Friday, there was a beginning of a run on banks and Armaguard ran out of money.

In the middle of this, I left for the United States and for some of the most important meetings I'd ever attend in my life.

During this period one meeting in particular stands out in my memory.

It was an ‘emergency meeting' of G20 Finance Ministers in Washington on the evening of October 11, 2008. It was a Saturday night, Washington time.

It followed an all-day meeting of the IMF. It was an unscheduled meeting. And it will forever be etched in my memory.

Such was the fear about global events, the United States President, George W. Bush, decided to attend.

President Bush opened by apologising to everyone present for the consequences of the US sub-prime mortgage crisis and the collapse of Lehman Brothers.

He assured us that the United States stood ready to work with both the developed and developing world and to do whatever it would take to meet the challenge head on. 
Just before President Bush was due to speak, the Brazilian Finance Minister, who was chairing the meeting, apologised for his poor English.

President Bush leaned over and whispered in his ear "that's okay; my English is not very good either".

The problem was, President Bush didn't realise the microphone was live.
His statement was broadcast to the world's top 20 Finance Ministers and Central Bank Governors.

Not the best way to instil confidence at the height of the Global Financial Crisis!

There was more work to be done the night following the meeting with President Bush. 

That night, I returned to the embassy residence to participate - via secure phone - in the special cabinet meeting taking place in Canberra on the morning of Sunday, 12 October, Australian time.

As is often the case, the most serious of decisions can sometimes be taken in the strangest of circumstances. 
It was 10pm Saturday night, Washington time.

The embassy was only able to set up a secure phone-line in the basement bedroom of a teenage child of a senior embassy official. I kid you not.

Sitting there on the bed - briefing the Cabinet on the international outlook and my meetings in Washington, and talking them through our yet to be announced stimulus package, and our bank guarantee due to be announced later that day - I looked up at the wall and thought "it can't get any more bizarre than this."

There I was staring at this Jimi Hendrix poster, and being the mad rock and roll fan I am, I couldn't get out of my head his version of Bob Dylan's ‘All Along the Watchtower'.

I don't know if anyone here knows it. If you do, feel free to join in.

"There must be some way out of here.
"Said the Joker to the thief
"There's too much confusion
"I can't get no relief".

They were thoughts running through the minds of many policy makers over the course of these traumatic days.

Now I don't need to tell this room how important the decisions taken in the Cabinet Room back in Canberra that morning were.

Decisions like the bank guarantee and the first and second stimulus packages, three of the most important decisions taken in the post-war era.

Despite having a fundamentally sound banking system, bank access to wholesale offshore funding was threatened.

My meetings in Washington had reconfirmed that we were facing the biggest threat to the global economy since the Great Depression but in the end the facts are these.

If it hadn't been for our two significant stimulus packages we would have suffered two negative quarters of growth and with it suffered the same skills and capital destruction that dragged down most other developed economies for the last five or six years.

What drove me, what drove the government was a determination not to repeat the mistakes of the Great Depression, when the economic orthodoxy was austerity. 

To this day, there are a lot of people who argue we shouldn't have done it but I think Reserve Bank Governor Glenn Stevens summed it up best when he said this of the Great Recession and our stimulus package.

"Had it gone on, we can be sure that tens of millions more people would be unemployed. But it didn't go on. It was arrested. As a result, we talk about the Great Recession, but we don't talk about the Great Depression Mark II. 
These initial interventions achieved what they were supposed to.

We might not like the politics or the optics of it all - all the ‘bailouts'... but the alternative was worse."

But the alternative is exactly what Abbott Government Ministers continue to argue in favour of. They say we would have been better experiencing the cleansing power of a recession rather than intervening with substantial fiscal and monetary stimulus.

But what I believe we are seeing both here and abroad is a shift in the political and economic debate. If we look at developed economies that in the aftermath of the Great Recession resorted to harsh austerity in an attempt to kick start growth what we see is limited economic growth and where growth has occurred the benefits have flowed to the few rather than the many.

Our Inclusive Prosperity Commission report argues that chronically weak global demand (secular stagnation) is the result of inappropriate fiscal policy, growing inequality and rapid technological change.

There is a lot of debate at the G20 level and more broadly about the need for structural reform.

Labor's reaction to the Great Recession was huge structural intervention without which Australia would have become profoundly more unequal. Australia unlike many other developed nations avoided higher unemployment, higher levels of bankruptcy and higher levels of debt that would have accompanied unemployment with an eight in front of it.

What our Labor Government did was put the interests of future generations first by responsibly deploying fiscal policy to support growth and fairness.

To me the real indicator of the health of an economy and a society is the degree of social mobility and the clear expectation that irrespective of your background or place of birth you have the capacity to succeed.

This graph shows the generational earnings elasticity - a measure of the extent that a father's income is a predictor of what his son will earn.

In the case of complete intergenerational mobility (that is, the generational earnings elasticity equals to zero), there would be no relationship between family background and the adult income outcomes of children. A child born into poverty would have exactly the same likelihood of earning a high income in adulthood as a child born into a rich family.

So as you can see Australia has much higher levels of social mobility than countries such as the United Kingdom and United States.

These outcomes are no accident. They are the result of three decades of structural reforms which made Australia more open to the world and the world more open to Australia.

These reforms increased productivity, competition and investment while maintaining a strong social safety net. They included the floating of the Australian dollar, bringing down of the tariff wall, prudent fiscal and monetary policy, enterprise bargaining (which occurs above a strong set of workplace conditions including a high minimum wage), a progressive targeted tax and transfer system, and universal systems for healthcare, education and superannuation.

The reforms I've just listed formed the foundation of the "Australian model" which has, over the past 30 years, seen Australia become the economic envy of the developed world. Many of these reforms are now under threat from the Abbott Government.

If they succeed, greater economic inequality and greater political inequality will follow.

Lamentably, our period in office also wore the stamp and scars of powerful vested interests who believe we live in a corporation not a community. These vested interests fought tooth and nail against the great enablers of equal opportunity and social mobility, which I mentioned earlier.

The book contains a detailed discussion of how our efforts at tax reform, carbon pricing, banking and media policies became pretexts for powerful vested interests to throw their weight around.

This policy battle was overlaid by a new development in the Australian political system, the Americanisation of the Right in this country. Quite plainly, they are obsessed with defending the wealthiest in our society, and sadly, sticking up for them alone has become their primary cause.

Nowhere is the Americanisation of the Right more evident than their campaign against the unions. When governments retreat from legislating fair frameworks for minimum wages and bargaining, and begin to withdraw from a civilized social safety net unions are the last line of defence against inequality. 

When trade union membership declines, inequality increases. This graph shows union membership compared with the share of income going to the top 10 per cent in the United States. As you can see there is a striking relationship.

It's clear that the combination of active unions within a fair bargaining framework has given the Australian workforce good income growth over the last 30 years. Add to this, high quality and affordable health and education services which have made us one of the most socially mobile developed countries in the world.

I first took up the inequality cause in February 2012 in my Monthly essay entitled "The 0.01%: The rising influence of vested interests in Australia" which prompted predictable screams of class warfare from the usual suspects. 

But increasingly a vocal minority has decided to oppose any reform, no matter how necessary and no matter how obvious its benefits to the whole nation, if they perceive it is in their short-term interests to do so. 

This is a recipe for unnecessary political division and widening social inequality, and unfortunately permanent reform failure.

Last year I had the opportunity to walk the high line through New York and on the side of an old brick building was a large advertisement which read "the French Aristocracy never saw it coming either".

It was yet another reminder of the ground swell of support sweeping around the world for a more inclusive form of prosperity.

IMF Managing Director Christine Lagarde recently put it more starkly, noting that the world's 85 richest people control more wealth than the world's 3.5 billion poorest people, and that this degree of inequality is casting a dark shadow over the global economy.

What we do to stem the growing tide of inequality in the developed world, at home and abroad, is the central economic and political challenge of our age. 

It's what drew me into politics in the first place, and it's what will dominate the political and economic debate in Australia in the years ahead. A debate led by the Australian Labor Party. 

That's what The Good Fight is all about - creating prosperity to spread opportunity because if we don't grow together, we grow apart.